TRENDING

Auctioning is not the wisest choice if you want best value

Nov 04, 1996

Auctions let winning set the price of a contract, when value otherwise would.

For auctions of purchase to have any chance of working, all prices must remain firm or only be lowered. But proposed changes to Section 15 of the Federal Acquisition Regulation would create a special class of simplified procedures to allow price revisions, up or down.

Using such auctions of purchase will invite sales on the basis of games, not on the basis of merit. For auctions to work, offered prices cannot be allowed to go up or be withdrawn. Otherwise, game bidding will ensue.

One offeror will bid the lowest, published price, but only the lowest bidder will know its price is the lowest. All other bidders will know that their prices are higher but that the low price probably will not stay low because of what I call ceiling searching. The low bidder immediately raises its price to find the ceiling.

Meanwhile, all other bidders know that might happen so they either wait to see the new floor or they could game the ceiling. That means that one or more of them make a spot reduction to erase the earlier ceiling, but for obvious reasons never lower a price below that of the earliest low bid because all bidders would rightfully believe that bid is no longer valid.

But the low bidder may well believe that one or more vendors will not go lower than the original bid, so it stands firm and ends up as still the low bidder on the auction board. But by how much? Now ceiling searching is done in earnestness, and prices work their way up, as, of course, they must do.

Meanwhile, the mad bidder gambit is invoked. A public interest group (headed by the agency's program manager perhaps?) submits bids to confuse the real bidders into thinking that really low bidding is going on. Knowing this is possible, real bidders tend to pay no attention to the low bid, since they suspect it's just a ruse to get them into a bidding frenzy.

The mad bidder masks the true low bid. At the very last minute, the mad bidder always withdraws its bid. Then the auction is just like sealed bidding because no one had any idea what the low bid really was until too late to change all bids.

Now, if offerors believe that there is no mad bidder, the prices merely go up as the low offeror searches for the ceiling. The low bidder rarely would go down from its initial bid, because any lower bid that it sees may be from a mad bidder and so it would be bidding only against itself. Moreover, since it knows it can always withdraw, and so does everyone else, it either does a ceiling search or stands pat until the very last minute.

The other bidders will have reason to better the disclosed low bid only if they believe the low bid is credible and will not be revised or withdrawn. Of course, this is assuming that someone wants the work at that price. But why do that early? Why expose a lower bid that might only be beaten?

So, they wait until the last minute with the exposed low bid becoming, at best, an ephemeral target. In sealed bid procedures, bidders imagine a target. In the envisioned auction procedures, someone else provides the target. Which is to say, it's just like sealed bidding.

Now if the bidders are really sophisticated, they might try the so-called low bid exposure roll-up. The low bidder revises it's price upward until it exposes the next-low bid which then becomes the low bid. The new lower bidder then begins raising its offer until exposes the next low bid. As each successive low bidder revises upward, all bids are exposed. Cool, huh?

Auctions of purchase assume that at least one seller will sell at any price. But sellers will only sell in auctions of purchase when they believe they can win the game. As noted, the game can be very complicated.

If sellers believe they cannot win the game, they will stay away in droves or demand that the rules be changed. But the game, ultimately, is loaded heavily against the sellers. That's why they'll maneuver and turn it into a sealed bidding process or they simply won't play. They may be crazy, but they ain't stupid.

Bob Little, an attorney who has worked for the General Accounting Office and a Washington law firm, teaches federal contract law.